Have you ever been to US to work and tried investing in India. Most likely you would have faced some issue under FATCA compliance asking you to confirm. So what is FATCA and why are Indians be governed by FATCA regulations?
This was the first question I had in my find when I encountered first. Unlike India, US is very strict on its tax collections. It not only make it easier to pay taxes but also has a better tax audit system in my personal opinion.
So in this will be a two post series where in first post I will try to give some idea about FATCA, what is FATCA and how to be FATCA compliant.
In the second part, I will explain on my understanding of how to be FATCA compliant for investment in Indian mutual funds. I have tried to be as correct as possible and do point if any point needs modification/detailed explanation.
What is FATCA? How to be FATCA compliant for Indians
FATCA is an act that focuses on instances of deliberate tax evasion by US citizens/residents on income generated at overseas locations.
This means parking funds outside US using foreign banks or failing to disclose assets and investments owned abroad, including in country of origin, to avoid paying taxes to IRS. This is different from tax avoidance which is a legal way of reducing taxes.
Since some countries including United States and India their citizens are taxed on global income. They have double taxation avoidance agreements with each other.
US persons who have been reporting income or paying taxes on income earned in these countries will not be seen as tax evaders under FATCA.
Hiring Incentives to Restore Employment (HIRE) Act which was enacted in 2010 by Unites States legislation has a separate chapter 4.
This chapter referred to as The Foreign Account Tax Compliance Act (FATCA), along with Section 1360 of Internal Revenue Service (IRS) code provide details on compliance of rules related to and reporting of foreign earnings and assets by US persons.
FATCA puts the onus of reporting on foreign financial institutions (FFI) that deal with them. Non-financial foreign companies (NFFE) that operate in the US are also expected to report on their holdings.
FATCA in a nutshell
The FATCA provisions impose a 30% withholding tax on payments to a foreign financial institution (FFI) for not complying with IRS rules, which in turn will place withhold payments to clients.
US persons residing in India will continue to report foreign income under FBAR. They can disclose previous overseas money under Overseas Voluntary Disclosure Program (OVDP) 2014.
FATCA doesn’t affect existing tax rights of US citizens in India or Indian tax residents in United States. Nor does it require reporting agencies to act as tax collectors for IRS.
In fact, under Model-1 agreement between Indian and United States, FFIs and other entities in India will be reporting to Indian governmental agencies rather than directly with IRS.
They however have to register at FATCA Registration Portal or file form 8957 with IRS.
Why are FII complying with FATCA rules?
While people are concerned extension of US tax rules to other territories, there is no way to avoid compliance and information reporting. Over 80 countries have endorsed FATCA by signing agreements of mutual disclosure.
The penalties for FFIs for non-compliance are severe. They will have to pay 30% tax on all US source payments like interest, rent, salaries, and dividend generated from US sources.
This includes total proceeds from sale of U.S. assets and capital received on maturity.
In a global economy, almost all institutions have US assets like bonds, stock and shares as personal or client (customer) holding. Imagine having to pay 30% tax on all these holding including that of clients.
US persons under FATCA
FATCA will affect anyone deemed a tax payer under US tax rules. This includes companies with investor/beneficial or controlling owners who are based in US.
For identifying foreign bank/investment accounts, you are considered a US person, if one or more of these criteria apply to you:
- Citizen (living or working outside US).
- Green Card Holder.
- Tax Resident (from other countries)
- Dual-citizenship owner.
- Children of US citizen/s.
- Place of Birth.
- Residence Address.
- US person as investor or controlling owner of entity (estates, trusts, corporations and partnerships).
Accounts covered by FATCA
The act covers both individual and business accounts. Your account may not be reported simply because it shows US address or place of birth, but transactions may be closely monitored for future reporting.
As an NRI, you may be required by banks and financial institutions to provide details on Country of Residence, Tax Identification Number (TIN or equivalent), Country of Birth, and Citizenship.
In case of entities, details mentioned above will be required about controlling owners of the business.
Reporting Financial Institution (RFI) in India and their role –
RFI includes custodial and depository institutions, investment entities and specified insurance companies.
This means banks, mutual fund companies, insurance companies, brokerage firms, hedge funds, credit unions, NBFC, savings and loan associations, trust companies, and superannuation and retirement plan administrators.
For FATCA reporting purposes, an RFI is either registered or resident in India and includes its Indian branches. It also covers Indian branches of foreign finance institutions.
A company providing investing and trading services on behalf of one particular customer, and insurance companies that only deal with general and term life insurance or indemnity reinsurance don’t have to report accounts.
No financial institution is currently exempt by US authorities, but this could change in the future.
- Follow certain procedures to confirm identify and status of a new customer.
- Check existing accounts to confirm their FATCA status. Ask for documentation and extra information from current customers.
- Register themselves with Indian Tax authorities (CBDT) and Internal Revenue Service (IRS) portal under the inter-government agreement signed by India and United States.
- Complete any reporting requirements specified by CBDT and RBI regarding FATCA.
- They will review financial accounts of individuals and entities and provide information on ones that meet certain threshold limit for savings/investment balance.
- Banks have to provide income report on the highest daily value in U.S. dollars in a year and transaction details of each such account.
- Corporations that are not listed or any business entity registered outside the U.S. but have U.S. Person/s on board with at least 10% stake in ownership have to provide relevant details about them.
- FII may also be required withhold 30% on certain payments to those account holders who fail to provide self certification or submit form 8938 for foreign income under FATCA.
- The following US person accounts are considered low risk and will not be reported by Indian FII – Jan-Dhan accounts, certain retirement or pension funds, savings account below $50000 limit, estate accounts, Senior Citizens Savings Scheme account, escrow accounts created under court order, accounts with excess credit card repayments.
* The RBI has clarified that the income reports of US persons with Indian assets and income will be in rupees.
Will FATCA apply to any non-US person or Indians?
Foreign Account Tax is meant only for US persons with threshold-limited accounts in India. Assets include investments and partitioned/inherited family assets in India –
- Individuals with bank or investment account balance above $50000.
- US person living in India with bank or investment account balance above $200000.
- Entities with bank or investment account balance above $250000.
- Immovable properties like land or house property, and personal assets like jewellery are not covered by FATCA
- Investment in partnership or proprietorship firm not included and not reported.
Your account can be scrutinized for containing any of these US based details:
- Place of birth,
- Address including PO boxes.
- Telephone number.
- “Care of” address.
- Current Power of Attorney or Authorized Signatory shows US address,
- Payment instructions to transfer money to US bank account or US address.
Financial Accounts, Threshold and Tax forms under FATCA
In addition to reporting foreign income under FBAR and PBIC report, US persons will have to submit self-reporting form – IRS Form 8938. This has to be attached to US person annual tax return to avoid penalties.
Asset/investment threshold limit –
- Gross assets owned in India are $50000 on last day of year or $75000 during that year for US person.
- Gross assets owned in India by married couple paying joint taxes are $100000 on last day of year or $150000 during that year for US person.
- Gross assets owned in India are $200000 on last day of year or $300000 during that year for US persons residing/working in India.
- Gross assets owned in India are $400000 on last day of year or $600000 during that year for married couple residing/working in India and paying joint taxes.
- A saving and depository account with balance below $50000 is not reportable but there is no such exemption for other financial assets.
- Land and other immovable property are outside purview of FATCA compliance.
US person account classification and aggregation for FATCA reporting
- To determine whether high value (above threshold limit) accounts of a customer belongs to US person, all their accounts will be taken into account.
- Using Unique Identification Number of account holder, they can find linked ones.
- In case of joint accounts, all holders will be considered to have equal share.
- In case of Passive non-financial entity (PNFE), the controlling owner will be taken into consideration to determine reportable accounts.
- Financial accounts other than saving or current accounts of both old and new customers will be reviewed, even if they are below threshold limit.
- Each reported account will be mentioned separately in Form 61B.
Few Examples for FATCA –
- For e.g.: If a US person account has $60000 in Indian bank as financial year-end balance, and Pension fund account of $10000 he/she is reportable person only one account of $60000 as pension fund is exempt.
- For e.g.: Ajay, an NRI (for tax purposes) has shares portfolio with $15000, mutual fund folio (account) $20000, and a joint bank account with resident mother of $30000. All these accounts are held in ICICI bank. He is reportable person as total balance is $65000 and all three accounts will be reported.
- AXY company has two accounts with Bank X -current account with $186000 and term deposit of $85000. As aggregated asset value is above threshold limit of $250000, both accounts will be reported separately by the bank.
While FATCA is aimed at tax collection for US it does confuse Indians regarding their tax status and investments in India. So better be vigilant and a bit of time to learn these few things when you’re abroad in US to have peaceful sleep.
I hope these examples are satisfactory and help you understand what is FATCA and how to be FATCA compliant. If you’re NRI Please share your views or experience of FATCA which will help others. In the next part, we will see how to be FATCA compliant for investing in mutual funds.